Budget 2017: The wealthy will pay more

Mariam Isa

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Wealthy taxpayers will bear the brunt of a hefty R28bn package of tax hikes this year, aimed at covering the biggest undershoot in revenue since the 2009 recession and speeding up the pace of transformation in the economy, finance minister Pravin Gordhan said in the National Budget unveiled on 22 February.

National Treasury left its modest economic growth forecasts for the coming three fiscal years unchanged and said that disciplined targets for budget deficits, debt and spending cuts remained on track. It is forecasting growth of 1.3% this year, 2% in 2018 and 2.2% in 2019.

But the Budget for the financial year 2017/18, which starts on 1 March, also focused heavily on new steps to address the inequality which has persisted in the country since the demise of apartheid.

“Growth in itself as we all know doesn’t generate equality or social justice – more needs to be done to make all South Africans benefit from economic growth,” Gordhan told reporters in a media conference before the Budget was tabled in Parliament.

A “strong conversation” was needed between government, business, labour and civil society on how to foster inclusive growth, as the country’s current levels of inequality and poverty were “unacceptable and immoral,” as well as out of line with its constitution, he added.

Gordhan’s rhetoric echoed President Jacob Zuma’s call for “radical economic transformation” in his State of the Nation Address earlier in February, but it does not mean that top Treasury officials will remain in place after an imminent Cabinet reshuffle likely to favour the president’s closest allies.

The responses from all three were blunt, and ominous for prospects that SA will keep its investment-grade credit rating this year. “It can take many years to build a solid institution – it takes a short time to mess it up,” Gordhan said.

The impact of patronage – perceived as pervasive in Zuma’s administration – was also discussed. “Patronage has a direct impact on growth, inequality and development generally,” Jonas said. Both Gordhan and Jonas are embroiled in court battles with the influential Gupta family, close friends of the president, who were implicated in the controversial State of Capture report released by former Public Protector Thuli Madonsela last year.

Former Eskom CEO Brian Molefe – who resigned due to the report’s allegations of his involvement with the Guptas – is expected to be sworn in as a member of Parliament, and speculation is rife that he will replace either Gordhan or Jonas.

Credit rating agencies would then be likely to downgrade SA’s sovereign rating to junk status – an event which Gordhan is credited with averting last year by spearheading a drive to unite business, labour and government.

Tax hikes

Treasury emphasised that government’s objective was not to transfer ownership of assets or opportunities to contract the state, but to change the economy’s structure.

“Government is committed to mass-based transformation that generates meaningful black participation in the economy and raises per capita incomes across the board, rather than a narrow change that merely transfers ownership, benefits an elite and perpetuates inequality,” the Budget document said.

Nonetheless, high-income earners were clobbered by new taxes. Treasury introduced a new tax bracket for people earning over R1.5m a year with a top marginal rate of 45%, compared with 41% for those earning more than R701 301 at present. That is expected to generate an additional R4.4bn.

At the same time dividends tax – which also mainly affects the wealthy – was raised to 20% from 15% and is expected to generate R6.8bn. Many other South Africans were also hit as tax tables were not fully adjusted for inflation, releasing another R12.1bn. A further R15bn in tax hikes are in the pipeline for next year.

The higher income tax bracket will be controversial as only 103 353 South Africans earn R1.5m or more a year – and yet they provide more than a quarter of personal income tax, which generates more revenue than VAT or corporate income tax.

Gordhan defended the move, saying Treasury believes in a progressive tax system, and without the transfer of resources from the well-off to the rest of society, SA would not have the social stability it requires.

In a worrying move for the private sector, Treasury said that in addition to closing corporate tax loopholes, it was considering removing some tax incentives and deductions for “excessive” debt financing in order to widen the tax base.

SA’s corporate tax rate is already one of the highest in the world, at 28%.

As expected, Treasury increased the general fuel levy by 30c/litre and the Road Accident Fund levy by 9c/litre, together with above-inflation tax hikes for the prices of alcohol and tobacco. These measures will contribute an additional R5.1bn to government coffers.

A controversial tax on sugar-sweetened beverages remains on the cards, and will be introduced as soon as the necessary legislation is in place. Treasury maintained that its preliminary assessment showed that the tax – which will be 2.1c/gram for sugar content of more than four grams/litre – showed a “relatively small” effect on job losses, which could be avoided.

Some of the revenue would be used to support health-promotion interventions for communicable diseases, it pointed out. A long-awaited carbon tax remained in the pipeline, and a draft bill would be published for public consultation in mid-2017.

Spending

More money was allocated to fund universities, with R6.6bn earmarked for this year and R7bn in 2018/19, giving the higher education budget an annual average growth rate of 9.2% over the next three years – the second-fastest after debt-service costs, which are rising by 10.5%.

The Budget made no mention of new allocations for a massive nuclear build programme, which the government says will go ahead despite widespread concern over cost, estimated at up to R1tr, and the potential for corruption. “Right now the whole process is in very early stages,” Gordhan said.

But Treasury did say it would forge ahead with plans to establish a National Health Insurance Fund during the fiscal year that begins in March. Government was exploring the idea of a small reduction in tax credit on medical scheme contributions to provide initial resources for the fund and a final NHI White Paper, with revised cost estimates, would be published during the year, it said.

Gordhan renewed his call for more efficient spending of public money, saying “there is enough money in the system to do all the things we want to do, if spent properly”.

Treasury highlighted risks to both the fiscal and the economic outlook. Persistent weak growth over the next decade would result in a rising ratio of debt-to-GDP – which is still edging up and expected to stabilise at 48.2% in 2020/21.

Policy risks could also arise from unanticipated spending pressures, such as the need to subsidise university fees, it added.

But probably the biggest threat to public finances over the medium term stems from the poor financial condition of many state-owned companies and public entities. Treasury said that guarantees to public institutions were expected to increase by R7.8bn from R469.9bn in fiscal 2015/16 to R477.7bn in 2016/17. Over this period, exposure through money borrowed against the guarantees was expected to climb by R52.5bn.

Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial correspondent for Reuters news agency after working in the Middle East, the UK and Sweden, covering topics ranging from war to oil, as well as politics and economics. She joined Business Day as economics editor in 2007 and left in 2014 to write on a wider range of subjects for several publications in SA and in the UK.

This article originally appeared in the 2 March edition of finweek. Buy and download the magazine here.